Why IPI needs large investments to expand

Market Realist

Intrepid Potash: An investor's guide to the American producer (Part 4 of 8)

(Continued from Part 3)

The fertilizer industry is capital intensive; this means that in order to produce the fertilizers, companies must invest large amounts of capital. Major projects start at billions and above. Most of Intrepid Potash, Inc.’s (IPI) capital expenditure, that is, the money invested in assets necessary to produce potash, is divided between buildings and plants, and machinery and equipment.

Machinery and equipment

It is common for fertilizer companies to have most of their capital invested in machinery and equipment, since they’re used to extract the raw materials necessary to produce potash and then process it to get the end product—fertilizer. As of September 30, 2013, machinery and equipment is the largest component of IPI’s long-term assets. They have almost $400 million worth of machinery and equipment, which represents around 33.9% of all assets.

Buildings and plants

The buildings and plants component includes administrative offices. However, the largest portion is taken by processing plants where potash is converted to its fertilizer form. Capital expenditures, which we will analyze in the next section, are mostly directed to these two components. Because the necessary capital need for potash production is so high, it is difficult for the companies to expand their production. However, this benefits companies already in the industry because it complicates the entrance for the new competitors, that is, there are high barriers set to enter the industry. For this reason, IPI as well as the investors, can expect the number of competitors to remain reasonably constant.

Continue to Part 5

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